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The White House Budget Director, Mitch Williams was doing pre-emptive interviews the day before the latest drift into deficit spending was released. Among the claims that the President inherited this economic downturn, he said that "a balanced budget is a high priority for this administration." Not the top priority, he continued, but it is definitely on the list.

There are several untested theories that were thrown out during Mr. Bush's State of the Union address. One of them was the perfect economic theory of more jobs mean more taxes mean less deficits equals a balanced budget. And it is possible that this might work out to some degree. But if this were a budgetary concern, it has been left out of the text of this enormous swing to the opposite side of that thinking. Little chance that increased jobs will pay enough in tax revenues to cover this bill.

I agree that the war was not of our making. But without Afghanistan showing any signs of resolution, we are making a march into another country and including it in this broad observation. The war on terrorism is the budget's highest priority although there is little mention about the ultimate cost of this campaign. Following this is the kicked up spending on homeland security, which, as it was submitted, actually shows a cut in spending on border security.

Health care was another promised reform and in the budget was the suggestion that Medicare and Medicaid can be revamped. Although we have only sketchy details at best on how this will be done, the President's "freedom of choice" will force the elderly into HMOs and other providers without forcing these organizations to compete for their dollars. This will do little to bring the uninsured into the ranks of the covered and will break a promise made some 37 years ago guaranteeing that low income folks get the care they need through Medicaid.

The humanitarian side of the budget shows that we can fund something only by cutting something vital. This is all well and good and we should be helping in the fight against AIDS in Africa. What is problematic is our South and Latin American brethren, wholly excluded from the State of the Union, shows a lack of understanding in the implications of underfunding in this part of the world.

The FBI and other (previously) poorly funded agencies will get a good boost from the budget while at the same time trimming programs that combat juvenile delinquency and hire police officers on a lacal level.

Two things that are most disturbing about the budget are the gloomy scenarios unveiled with the budget itself. Not the projected $304 billion deficit for '03, nor the $307 billion shortfall in the following year, but the outlook that shows little improvement in unemployment, modest growth at best, and continued pile-up of tax cuts that are providing little in the way of stimulation or growth. Economic growth is seen Improving and then steadying itself at 3.8%, which is keeping in line with current economic projections and would probably be achieved without any help from Washington. The second thing is the shortening of the administration's current projections from ten years only a year ago to five years now. This leaves one to wonder if they can really understand the long term implications of this red ink, or is it easier to spin bad news if we think things are going to improve.

But the President has a plan to change the retirement system and to get tax revenue up. The idea is simple: tax you now for money that might be taxed in the future. The way to do that is to revamp the IRA regulations passed by Congress in 1974. The effect will be interesting at best.

Here's how it is slated to work. If you have a Coverdell education plans, state tuition savings plans and Archer medical savings accounts, you can convert those plans to the new Lifetime Savings Account. There is little evidence that doing anything to these programs as the proposed would do anything to make savings more attractive. Contribution limit, periodically adjusted for inflation, would be $7,500.

R.S.A accounts will be the demise of the traditional IRA as we know it. Tax deferred IRA accounts will no longer accept contributions and if the owner of such a plan would like to convert to these new Retirement Savings Accounts they would need to do so this year. The upfront deduction is what attracts folks to these accounts. Without the tax savings, those who participate at all, would be left with little alternative. But, if you make a lot of money and were excluded from Roth accounts, you are now able to join in the fun. If you are saving little now, as most of middle America does, these new plans will have no real benefit for you. From a tax point, the way it works is simple. You withdraw the money in your IRA, pay the applicable taxes, and put the money in the RSA accounts. Those taxes can be paid over four years. Those accounts would then be free of retirement income taxes. Contribution limit, periodically adjusted for inflation would be $7,500.

Seeking to simplify, or at least that is the pitch given by the Treasury, the 401(k) plan, the simple 401(k) plan and the governmental 457 plan, the proposal is to combine them into a new Employer Retirement Savings Account. They are strikingly similar to the old plans that had employers matching contributions. Contributions for workers under 50 would remain at $12,000 maximum. Workers over 50 year old could contribute $2,000 more with increases in the coming years, and of course this would also open the plans up to the real savers, the wealthy.

The administration claims that the rules that are currently in effect are confusing and prohibit companies, especially small ones, from offering the plans to their employees. Looking deeper, these new plans will eliminate rules that protect lower wage employees from company officers creating what is know as "top heavy" accounts or basically tax shelters for themselves. The old rules required employers to contribute 3% to the lower wage worker's accounts by way of guarantee. According to some employers, this only created prohibitive paperwork. The lower wage employee could probably use a 3% wage increase as opposed to forced retirement savings.

Two things are wrong with the new proposal. First, small company employers are given little incentive to create these plans for their employees when they can take advantage of their ability to sock away up to $30,000, owners and spouses, in the new tax advantaged accounts. Secondly, at least the old rule provided matching contributions. And everyone knows that it is the attractiveness of the matching contribution that keeps the few employees in some of these plans. Take away the match, and you have basically turned your back on the first rule of pensions.

If enacted, your old 401(k) will become a new ERSA. It will also bring the country closer to a tax on consumption by combining these retirement plans with the dividend relief proposal. The theory entertained by the President's Council of Economic Affairs, R. Glenn Hubbard is to tax at the time of purchase, suggesting that spending now is as effective as spending in the future.

This is another shadow dance by the administration. If they can dupe folks into converting their traditional IRAs, there would be a pop in the tax revenue now, a drop in the future and the income inequality would spread considerably.

If this does come to pass, and the administration succeeds in putting a freeze on current plans, the wise will simply open new accounts, save the tax that would be paid at the transfer, and move forward. Most, I'm afraid, will simply stop saving.

As I explained to my son that the history being shaped now will change his world, he showed the typical short sightedness of any fifteen year old and laid out his budgetary needs for the following day.

Today's Commentary: 02.02.03
The Week Ahead/The Behind